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Tough economic times are softening Canada’s hard line on Chinese investment

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TORONTO There's nothing quite like staring into an economic abyss to shake up a country's perception of its place in the world and where it may have to look for a lifeline once in a while.

Some five years after China Minmetals Corp.'s failed $4.7-billion bid for Noranda Inc., an effort that ignited a political firestorm in Canada, the red dragon is making fresh forays into the country. This time around, the welcome mat appears to be firmly in place.

The brutality of the recession has provided fresh lessons to the governing Conservative Party about Canada's interdependence with other nations and the importance of having friends in faraway places at a time when its No. 1 trading partner to the south is suffering from a wounded economy. Ottawa knows that China in particular—with its growing influence and economic might—cannot be ignored or trivialized any longer.

This year has already witnessed a flurry of Chinese acquisitions in the Canadian resource sector. Several were made in the metals industry, including Wuhan Iron & Steel (Group) Corp.'s $240-million investment in Consolidated Thompson Iron Mines Ltd.'s Bloom Lake property in Quebec, and Hunan Nonferrous Metals Corp. Ltd.'s purchase of Canadian miner Beaver Brook Antimony Mine Inc. for $29.5 million. By far the biggest, though, was China Investment Corp.'s Canadian $1.74-billion ($1.5-billion) investment in Teck Resources Ltd., the debt-laden company that appeared to be heading toward insolvency during the dismal days that followed the collapse of Lehman Brothers.

The credit crisis and depressed commodity prices of late 2008 and early 2009 made many Canadian resource companies more receptive to Chinese investors. At the same time, there was a growing recognition by Prime Minister Stephen Harper's government that a strong political relationship was vital in order to make these business ties grow.

The Conservatives' about-face marked quite a change from when they came to power in 2006 and made a series of statements and policy actions that noticeably cooled relations with the Chinese. Among them was naming the Dalai Lama, Tibet's spiritual leader, an honorary Canadian citizen, and a series of criticisms voiced by Harper's government over China's alleged human rights abuses.

Relations between the two countries may only be tepid now, but they are warming. In June, Harper amicably welcomed Chinese Foreign Minister Yang Jiechi for a two-day visit to Ottawa, while Trade Minister Stockwell Day and Foreign Affairs Minister Lawrence Cannon flew to China for a series of diplomatic meetings in recent months. Canadian Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney visited China in August, and Harper himself is expected to visit the country in coming months.

"This government, with the recession, has gone very pragmatic with China," Wenran Jiang, Mactaggart Research Chair of the China Institute at the University of Alberta, said in an interview with AMM. "Never before has Harper had the realization that he must engage China with mutual summit visits on a regular basis."

There's no reason to believe the deals won't keep coming, providing politics don't get in the way. In September, the Vancouver, British Columbia-based think-tank Asia Pacific Foundation of Canada said the Teck deal likely marked the beginning of a new Chinese "investment wave" in Canada. In releasing the results of an extensive survey of Chinese corporations co-conducted with the China Council for the Promotion of International Trade, it found that despite the political issues of the past, Chinese companies perceive Canada as one of the most open economies in the world in which to do business and among the most favorable.

Nearly three-quarters of surveyed Chinese companies have never invested overseas, but 40 percent indicated they would increase their outward foreign direct investment in the near future. In the meantime, China's Commerce Ministry is maintaining it will continue with its so-called "go abroad" investment policy, despite the recent hiccup of Aluminum Corp. of China's failed $19.5-billion investment in Rio Tinto Plc.

Lingering political and societal fears over Chinese boardrooms calling the shots in important business decisions and having significant control of Canada's resources may mean that the path of least resistance for now is for Chinese acquisitions to stay focused on smaller assets, joint ventures or equity infusions. But as the two countries grow more familiar with each other, large-scale acquisitions of entire Canadian corporations would seem to be the next step.

That doesn't mean there won't be obstacles. Any acquisition of a Canadian company for more than C$312 million ($289 million) requires a review under the Investment Canada Act, legislation that was toughened this past spring to include a national security test. The sale of 17.2 percent of Teck to the Chinese sovereign wealth fund easily sailed through the review and received no opposition from the Canadian government. It's worth noting, however, that the changes to the Investment Canada Act were not enacted in time for the Teck acquisition, and its implications on such future foreign purchases are still somewhat unclear.

Harper recently said that Ottawa would not throw up further barriers, given the importance of restoring private investment during a global recession. These are comforting words to the Chinese, no doubt, and to the companies that want to develop business ties. But the real test may be whether there will still be welcoming arms after better economic times have returned.

Darcy Keith

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